Questions surround Nova
RESTRUCTURING: NOT CONDITIONAL ON LISTING OR TRANSFER OF EX-SHAREMAX PROPERTIES.
Once debenture holders swap debentures for shares, they’ll have no further claims against Nova for their initial Sharemax investments. Moneyweb
Nova PropGrow (ex-Nova Property Group) debenture holders should be cautious in evaluating the proposed Scheme of Arrangement: it proposes a very complex transaction which will significantly impact the value and recoverability of their original Sharemax investments.
Moneyweb identified several issues that may not be in debenture holders’ best interests. Without more information, it’s highly unlikely Nova will list soon.
Here are the main concerns to be addressed before the listing will be approved.
Wrong definition?
The legal definition of the debentures that around 18 000 former Sharemax investors own is critical.
Nova’s board proposes the scheme under Section 155 of the Companies Act, which concerns business rescue and compromise with trade creditors. Within this context, Nova regards its obligation to repay debentures similarly to paying other trade creditors.
Legal and forensic accounting specialists suggest debenture holders have more pronounced rights than those of trade creditors. It seems more prudent to have proposed the Scheme of Arrangement under Section 114 of the Companies Act, which guides interaction between a board and holders of securities in a restructuring.
Section 114 prescribes the board must commission an independent, fair, reasonable statement to assist security holders to take informed decisions. This isn’t necessary under Section 155.
It’s hard to see how an independent advisor would recommend the scheme in its current form. Without an independent valuer’s fair, reasonable assessment, debenture holders have nothing to base their investment decision on.
Critical conditions absent
Another concern is the absence of two key scheme preconditions: the JSE listing of shares to be issued in exchange for the debentures, and the acquisition of all Nova PropGrow ordinary shares, to effectively transfer indirect ownership of the underlying properties to the listed companies.
The scheme documentation and all Nova communication to debenture holders claims they would be allowed to sell their shares upon the listing.
Unfortunately, the listing isn’t a condition for the scheme. If approved, the scheme will continue even if the listing is delayed/ rejected. This means debenture holders will receive shares in an unlisted entity, where trading of shares will be very illiquid.
A near-future listing is very unlikely.
Under the scheme the debenture holders will relinquish all their debenture rights – linked to individual properties within Nova PropGrow – and receive shares in a new company.
There is, however, no provision/condition in the scheme documentation that the properties (or NovaPropGrow shares) will be transferred to the listed entity.
Therefore, if the scheme is approved, debenture holders will receive shares in a company which may never list and may no longer own the original underlying properties. The unlisted company’s only asset would be a loan agreement with Nova PropGrow and/or Nova Investments.
Value dilution
Nova debenture holders will also see a significant dilution of their rights and investment value. Currently, they hold preferential rights over other creditors and would be paid first before other creditors in a liquidation scenario.
Under the new proposal, the preferential rights fall away. Once debenture holders swap debentures for shares, they’ll have no further claims against Nova for their initial Sharemax investments.
Further, the number of shares investors receive for their debentures is determined by a special formula linked to the underlying properties. This conversion ratio varies significantly between the different properties. Some debenture holders may receive shares valued at over 85% of the value of their debentures, others less.
Villa and Zambezi investors will only receive shares to the value of 15% and 20% of their original investments.
What should investors do?
Although listing isn’t a bad idea, the proposed Scheme of Arrangement won’t unlock as much value for debenture holders as it could. Clarity is needed about debenture holders’ rights. Also, a successful listing and scheme of arrangement to acquire all the shares in Nova PropGrow should be made a condition for the scheme to continue. The director shareholders of NovaPropGrow should provide irrevocable undertakings to swap their shares into the to-be-listed company.